The in-house courts of the Securities and Exchange Commission (SEC) are not just at odds with the separation of powers, they also don’t serve their alleged purpose of efficient justice.
In Federalist 47, James Madison, quoting Montesquieu, warned that government would become an oppressor if the prosecutor were “joined” with the judge, which is why the Constitution separates these functions into the executive and the judicial branches, respectively. At the SEC, however, these functions are joined, such that prosecutors and judges work under one roof. Anyone, regardless of whether they are registered with the SEC, can be hauled into these courts over alleged regulatory violations, and potential punishments are severe, including steep civil penalties and employment bars.
The SEC’s in-house courts exist in obvious tension with — if not an outright violation of — the constitutional separation of powers. Progressives have argued that this risk of injustice to the accused should be offset by their efficiency in trying cases. Congress has treated the SEC’s combination of prosecution and judging as a necessary evil that can be managed. Accordingly, the SEC is required to maintain “internal separation,” which is basically an institutional firewall between the agency’s prosecutors and judges.
In theory, internal separation achieves a separation of powers within the agency. Yet these safeguards are hardly foolproof, as evidenced by the SEC’s stunning admission last April that the agency’s prosecution team “accessed [judging] memoranda” in “a number of adjudicatory matters.” Alas, this unprecedented breakdown of internal separation received scant attention on Capitol Hill; instead, the agency cleared itself of any malfeasance (without elaborating). How convenient. And even if the agency’s “internal separation” worked as designed, there still would be no decision-making independence, since anyone who draws a paycheck from the SEC has a powerful pre-commitment to the agency’s actions and agenda.
Still, there’s another problem for defenders of the practice: The agency’s courts are grossly inefficient. They fail the only purported justification for their existence.
Before we get to the data, let’s first review how the administrative process works. After an investigation, the SEC begins a prosecution by filing an Order Instituting Proceedings, which formally sets forth the charges against the alleged violator. The parties first litigate before an administrative law judge (ALJ), who renders an initial decision. The losing party can then appeal the ALJ’s initial decision to a principal officer — in this case, the five-member commission that heads the SEC, who collectively make the final decision.
Under the SEC’s rules of procedure, the ALJs have approximately 16 months to try contested cases. At the next step, the commission has 10 months to perform its appellate role, but the clock does not start until briefing is completed and the commission has heard oral arguments (if any). Putting it all together, the SEC has more than two years to conduct an administrative proceeding, in addition to however long the commission takes to conduct a hearing and full briefing.
These are generous targets that the SEC has set for itself. Even if the agency aced its (nonbinding) deadlines, its adjudications would be no more efficient — and likely less so — than judgments obtained through a federal court proceeding culminating in a jury verdict, which average 771 days, or just over two years, in duration.
Yet the SEC fails to meet even these permissive timelines. To be sure, the lion’s share of blame does not rest with the agency’s ALJs, who, for the most part, either meet or come close to meeting their target deadlines. The bottleneck occurs with the commission’s appellate role. Over the past five years, the SEC has issued only three opinions involving agency enforcement actions. Meanwhile, the agency’s backlog has grown to 13 cases, and the average pending proceeding is more than six years old.
One of those pending cases involves Michelle Cochran, whose plight demonstrates everything that is wrong at the SEC. In April 2016, the SEC began an enforcement action against Ms. Cochran, a Texas-based CPA, for alleged regulatory violations. Today, more than six years later, her agency trial drags on and the SEC recently acknowledged that her case is among those that was affected by the breach in internal separation.
In the meantime, Ms. Cochran chose to fight back. With the assistance of the New Civil Liberties Alliance, she filed suit in federal court, challenging the constitutionality of the SEC’s in-house courts. In response, the government argued that she must first endure the administrative trial process, before a federal judge can weigh her constitutional arguments, which challenge the legitimacy of that administrative trial process. The trial court sided with the government, but the U.S. Court of Appeals for the Fifth Circuit reversed.
Now, her challenge is before the Supreme Court. The government seeks to have Ms. Cochran restart the administrative process anew — more than six years after that process began. All she seeks is her day in (real) court to make her constitutional claims against the SEC.
Alas, Ms. Cochran’s experience appears to be the norm. It’s bad enough that the SEC’s administrative process is an affront to separation of powers: It has failed to maintain the fig leaf of “internal separation” between its prosecutors and judges, and true independent or neutral decision making is impossible. But the slow pace of justice at the agency’s in-house courts undermines their entire rationale. It’s all constitutional pain and no efficiency gains.
This op-ed was originally published at The Hill on December 12, 2022.